Essar refinancing deal finalized, says company

The terms of a debt refinancing plan that is expected to allow Essar Steel Algoma to avoid a third round of restructuring has been finalized with creditors, says the company.

In a release this morning, Essar Steel Algoma said it has reached an agreement that will provide a near-term capital infusion from its parent company Essar Group Ltd. of up to $100 million U.S., with $25 million coming within the next five days.

Essar Group is expected to inject a total up of to $300 million under the agreement, which the Sault steelmaker says will “ensure the appropriate liquidity required to complete scheduled capital improvements and allows for the seasonal raw material build.”

The refinancing of the company’s senior secured debt, which involves note holders receiving a cash payment of 32.5 percent of the value of their notes, along with 55 percent in new notes, will “substantially deleverage Algoma’s balance sheet and reduce financing costs,” says ESA.

“This agreement provides for a comprehensive capital infusion, a substantial deleveraging of our balance sheet and the refinancing of all of Algoma’s senior secured debt,” said said Kalyan Ghosh, CEO of the Sault-based company in today’s release. “Our summary financial projections show EBITDA in the region of US$300 million and cumulative unlevered free cash flows of over US$700 million between FY2015 and FY2019 based on market pricing inputs under the new iron ore pricing contract. When combined with our strong business fundamentals, best quartile cost position and US$90 per ton run-rate EBITDA Algoma is strongly positioned with the financial flexibility for the future.”

Meanwhile, city officials said they were reassured during a meeting with Essar representatives last week that the company’s future is not as bleak as it may have seemed.

The meeting had been previously scheduled to address Essar Steel Algoma’s part in the city’s efforts to create a deep-water harbour, but came the same day the steelmaker announced it had reached an agreement in principal with creditors.

“At the end of the meeting it left us more comfortable than before the meeting that while not without some difficulties, the days ahead are bright for Essar,” said Joe Fratesi, the city’s chief administrative officer.

Fratesi said the meeting including a member of the Ruia family, which controls India-based Essar Group, and executives from other Essar companies.

According to court documents filed in Ontario, the recapitalization will reduce the company’s overall debt load by roughly $145 million and reduce interest payments by approximately $40 million per year.

Fratesi noted that the company, in releasing losses over recent quarters, has been “explicit in letting people know why those things were happening.”

Weak demand, low steel prices, high iron ore costs and a delay in receiving coal supplies due to heavy winter ice this past season have all been cited by Essar as contributing to its current situation.

“In this meeting, they explained to us that many of those things now were either behind them or under control,” said Fratesi.

“There are better days ahead. That’s the message that we took out of it and hopefully that’s the message that the community is taking out of it,” he said.

The following is the full text of this morning's release from Essar Steel Algoma:

Essar Steel Algoma Inc. (“Algoma”) announced today that it has finalized the terms of its support agreement and corresponding equity commitment with the investment fund that is the ultimate owner of Algoma, Essar Global Fund Limited (“EGFL”), and holders (the “Ad Hoc Noteholder Committee”) of more than 70% in principal amount of its 9.875% senior unsecured notes (the “Notes”). 

This agreement provides Algoma with a near-term capital infusion from EGFL of up to US$100 million with the first US$25 million installment payable within five business days. 

This cash infusion will ensure the appropriate liquidity required to complete scheduled capital improvements and allows for the seasonal raw material build. 

The agreement provides for a total equity infusion from EGFL of up to US$300 million concurrent with the refinancing of all of Algoma’s senior secured debt, which will substantially deleverage Algoma’s balance sheet and reduce financing costs.

In lieu of full repayment of the Notes, holders of the Notes will receive a cash payment equal to 32.5% of the amounts owing on the Notes plus a restructured, non-cash pay junior lien instrument equal to 55% of the amounts owing on the Notes, subject to certain call rights.

The transaction is subject to, among other things, the execution of definitive documentation, completion of the consensual processes under the Canada Business Corporations Act, and will be completed on or before November 15, 2014. 

“This agreement provides for a comprehensive capital infusion, a substantial deleveraging of our balance sheet and the refinancing of all of Algoma’s senior secured debt. Our summary financial projections show EBITDA in the region of US$300 million and cumulative unlevered free cash flows of over US$700 million between FY2015 and FY2019 based on market pricing inputs under the new iron ore pricing contract. When combined with our strong business fundamentals, best quartile cost position and US$90 per ton run-rate EBITDA Algoma is strongly positioned with the financial flexibility for the future” said Kalyan Ghosh, Chief Executive Officer of Algoma.

Further information regarding the details of the Plan of Arrangement and the related voting process will be outlined in the Management Proxy Circular, which will be distributed to unsecured noteholders and posted to Algoma’s website. 

The Noticing Agent, Donlin Recano has also established a webpage at www.donlinrecano.com/essarsteelcanada and www.donlinrecano.com/essarsteelus where further documentation related to the process can be found. 

The Blackstone Group, Kirkland & Ellis LLP, and Stikeman Elliott LLP represent Algoma as financial advisor and outside legal counsel, respectively. The Ad Hoc Noteholder Committee is represented by Lazard, Paul Weiss, Rifkind, Wharton & Garrison LLP, and Goodmans LLP. 

This release is not an offer to sell or an offer to buy any securities. 

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